Finance Case Study Example | Topics and Well Written Essays - 1000 words

Finance - Case Study Example This involved the rise in the price of diesel, a shortage of drivers and an effort to maintain their depreciating fleets. Problem Statement The biggest challenge included debts from credit cards, commercial mortgages and machine financing. Exchange of money for a new issue of preferred stock and warrants was the beginning of GE Capital. This led to deterioration of the company at a remarkably fast rate. This deterioration, in turn, led to a fall in price of credit default swaps, lenders’ insurance and actual bonds of the company (Norton, Diamond and Pagach 245). Sales of common stock does not always imply a success in the financial position. Other Issues In debt and borrowing, it is of importance that GE Capital embraces its position with the AAA ratings. This rating is of the essence as it helps generate 40% of its revenue from the units. GE experienced a fall in earning up to below 110% of the fixed charges of the unit. This is defined as interest expense with an additional portion of rental costs. To gain financial stability, GE Capital needed to take the ratio back to 110%. A rise in the debt ratio above 8 to 1 would require the parent company to add more funds. Revenue was fixed at 170% at year end for GE Capital. This, however, was not matched by the equity to debt ratio as it was above 7.3 to 1 on the high end that was the case for various companies. Moreover, there is a greater share of more than $43 billion in loans that were securitized. Another problem was recruiting and employing quality drivers and raising finance for its operations. Other widespread concerns were the increasing expense on diesel fuel and machine parts and maintenance. There were also other concerns regarding the costs of operation related to complying with government regulations. Analysis Liquidity Current ratio Industry 2002 2001 2000 =1.1:1 2.3:1 2.8:1 3.4:1 Acid Test Ratio Industry 2002 2001 2000 =0.9:1 1.7:1 1.9:1 2.2:1 Working Capital Industry 2002 2001 2000 N/A 34,421 28,252 33,062 Profitability Return on Equity Industry 2002 2001 2000 30.2% 52.6% 13.0% 0.0% Stability Industry 2002 2001 2000 Debt/Equity 1.56:1 2.2:1 4.2:1 0.23:1 Interest Coverage N/A 5.5* 1.7* 1.0* Industry 2002 2001 2000 Age of Receivables 42.6 days 18days 16days 40days Age of Payables N/A 19days 14days 34days The liquidity ratio indicates that GE Capital has the ability to meet its financial needs. It is higher than the industry ratio. However, there is a decline in the ratios every year from 2000. There is no consistency in the levels of working capital throughout the three years. In 2002 working capital is greatest an indication that GE is doing well. Profitability of the company has been on the rise throughout the three years. It is higher than the industry level implying acceptable profitability. Stability of the company is higher than the industries as well as the repayment periods. This shows that the GE Capital is at a favorable financial position. Statement of Changes Sources: Other Receivable 53 Prepaid Expenses 1,172 Loan (New court) 13,631 Loan ( GE Capital) 189,000 Retained 56,999 Uses: (20,092) Net Cash Increase 300,732 Cash 31st Dec 2000 (3,877) Cash 31st Dec 2002 8107 The net cash increased by 300,732 and there was also an increase in cash in 2002 to 8107.It indicates the ability of GE Capital to meet its short term financial responsibility. It shows that the company has a remarkable liquidity. The Four C’s of Credit Character refers to the credibility of a business